Royalties can be considered a fairly unique form of investment and normally offer a reasonably steady low-risk return on your money in comparison to more traditional investments like stocks.

The way that investing in royalties works is that you are offered the prospect of a regular monthly or quarterly payment based on the company’s revenue, which is fundamentally different to the volatility involved in stock market speculation.

This is why royalty investments are growing in popularity as investors see it as an opportunity to introduce further diversification into their portfolio and generate monthly, quarterly or annual revenues.

To give you an indication of the size of the market, upwards of $8 billion is collected annually by the Confederation of Societies of Authors and Composers on behalf of around 2.5 million artists around the globe.

Royalties explained

A royalty is the term used to describe monetary compensation paid to the owner of an asset, which can often be an intellectual property.

The owner has the option of licensing this asset out to be used by another party in return for being paid a percentage of the net revenues generated by its usage. This allows royalties to be used as a way giving investors in a company a percentage ownership of future revenues and paying them at specific intervals.

Royalties are most commonly used as an alternative investment in three distinct sectors. These are venture financing, gas and oil exploration and entertainment income.

Venture financing

The principle behind venture financing is to allow lenders to invest in a business in return for part ownership of the company and the investor looks to get their money back at a later date if the business is acquired or launches an initial public offering on the stock exchange.

Royalty-based funding allows a greater level of flexibility in the deal and the investor may not get a share of the company but instead receive a monthly or quarterly payment based on the revenue of the company, in return for the cash they have agreed to put into the business.

Natural gas or oil royalties

Owning a natural gas or oil royalty is not dissimilar to actually having part-ownership of the well itself.

The idea is to distribute profits to shareholders after covering operational costs, staffing and management fees and owning a natural gas or oil royalty trust will offer you the prospect of sharing in the fortunes of well you have put an investment in to.

Entertainment royalties

Investors have the chance to share in the royalty streams generated by all types of entertainment mediums such as music, TV, movies and book publishing.

The royalties are due to the originator like the songwriter, artist or writer but in order to generate instant liquidity for themselves, they have the option of selling their work or a percentage of future income through Royalty Exchange.
Royalty income is auctioned off and the successful buyer can subsequently generate a consistent income stream in return for their investment .